DICK'S Sporting Goods, Inc. (DKS) Q3 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the DICK'S Sporting Goods Third Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Anne-Marie Megela, Vice President of Treasury Services and Investor Relations. Please go ahead.

Thank you, Emily. Good morning, and thank you for joining us to discuss our third quarter 2014 financial results. Please note that a rebroadcast of today's call will be archived on the Investor Relations portion of our website located at dicks.com for approximately 30 days. In addition, as outlined in our press release, the dial-in replay will also be available for approximately 30 days. In order for us to take advantage of the Safe Harbor rules, I would like remind you that today's discussions include some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which include, but are not limited to, our views and expectations concerning our future results. Such statements relate to future events and expectations and involve known and unknown risks and uncertainties. Our actual results or actions may differ materially from those projected in the forward-looking statements. For a summary of the risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to our periodic reports filed with the SEC, including the company's annual report on Form 10-K for the year ended February 1, 2014. We disclaim any obligation and do not intend to update these statements except as required by the securities laws. We've also included some non-GAAP financial measures in our discussion today. Our presentation of the most directly comparable financial measures calculated in accordance with generally accepted accounting principles and related reconciliations can be found on the Investor Relations portion of our website at dicks.com. Leading our call today will be Ed Stack, our Chairman and Chief Executive Officer. Ed will review our third quarter results and key business drivers. Joe Schmidt, our President and Chief Operating Officer, will then review our omni-channel development program and specialty concepts. After Joe's comments, André Hawaux, our Chief Financial Officer, will provide greater detail regarding our financial results, capital allocation and guidance for the fourth quarter and full year 2014. I will now turn the call over to Ed Stack.

Thank you, Anne-Marie. Earlier this morning, we announced our third quarter 2014 results, which included consolidated earnings per diluted share of $0.41, at the higher end of our guidance range of $0.38 to $0.42 for the quarter. Our consolidated same-store sales increased 1.1%, at the lower end of our guidance of between 1% and 3%, due to the continued pressure in golf and hunting. The balance of our business, excluding golf and hunting, continued to perform well with comps increasing 4.6%. We once again demonstrated our confidence in our long-term growth by repurchasing an additional $75 million of the stock in the quarter. In the third quarter, we saw continued growth in the categories that benefited from our sales -- from our space reallocation that was completed during the second quarter. As a result, our stores now offer a broader, more compelling selection of athletic apparel, supported by an elevated and differentiated product presentation. Our hunting business comped down mid-single digits in Q3, slightly below our revised expectations, as hunting is not rebounding as quickly as we had anticipated. We expect our hunting business to be approximately flat in the fourth quarter as year-over-year comparisons begin to ease. As we look at our golf business, Golf Galaxy comped down 8.9%, and our DICK'S golf business was down a similar magnitude. As we look to the fourth quarter, we believe that our merchandising, product offerings and advertising will make us a destination this holiday, both in stores and online, and drive our comp store sales growth. Our guidance range incorporates these strategies, along with our expectation that the retail environment will remain competitive and promotional. André will walk you through our guidance in more detail. I'd like to thank our associates throughout the company for the hard work and determination they showed to deliver our Q3 results and for the upcoming efforts during the holiday season. As this is Joe's last earnings call prior to his retirement, I'd like to thank him for the last 25 years he spent with us. Joe has been our President for over 6 years. He has served in many roles in the company and has done a great job in every one of them. Joe's not only been the President of our company but also one of my best friends over the years. All of us at DICK'S, and especially me, are going to miss him. I'd now like to turn the call over to my friend, Joe.

Thanks, Ed. During the third quarter of 2014, we further expanded our omni-channel platform, growing both our store base and our e-commerce while driving store productivity. We opened 24 new DICK'S stores, relocated one store that was at the end of its lease and fully remodeled 5 stores. We also closed one DICK'S store. In the first 2 weeks of the fourth quarter, we completed our 2014 store development program with 6 additional DICK'S stores opening. This brings our store count to 603 DICK'S stores in 46 states. During 2014 for DICK'S, we opened 45 net new stores, relocated 5 stores and fully remodeled 5 stores. We will discuss our 2015 store opening plans on our fourth quarter earnings call. In the third quarter, we also opened one new Golf Galaxy store and relocated one store. We expect to close 2 Golf Galaxy locations that are at the end of their leases in the fourth quarter. This will bring our Golf Galaxy store count to 78 stores at the end of the year. We also opened 7 Field & Stream stores in the third quarter, bringing our store base to 10 stores and completing our Field & Stream opening plans for 2014. As Ed mentioned, in the second quarter, we had reallocated space within our existing DICK'S stores to increase our offering of women's and youth athletic apparel, and the space reallocation was set for the entire third quarter. As part of this initiative, we took approximately 1,000 square feet out of our golf equipment area and additional square footage out of fitness equipment. The reallocation of store selling space was completed in all of our single-level stores, which represents approximately 85% of our total store base. Customer response to the new product selection and merchandising presentation has been great. We also realigned our store staffing to support the growth areas of our business such as athletic apparel, team sports and footwear. Our new DICK'S stores continued to deliver strong performance with new store productivity of 96.2% in the third quarter. As you may know, all of our existing stores and new DICK'S stores feature ship-from-store capabilities, allowing us to connect online shoppers with inventory in our stores. Our new stores enhance our distribution network, as new stores can also be used to fulfill e-commerce orders. We continue to optimize our ship-from-store fulfillment to improved inventory turns, reduce shipping costs and accelerate merchandise delivery to our customers. As we open new stores -- as we open stores in new markets, we've also seen our e-commerce business, although off a small base, increase by over 50%. This is another example of importance of the stores to our omni-channel growth. Another feature of our omni-channel offering is Buy Online, Pick Up in Store, which is available in all of our stores in a limited number of categories. We have found that Buy Online, Pick Up in Store is more popular for items that have higher shipping costs. We believe Buy Online, Pick Up in Stores is not only a benefit to our customers, but it will also draw customers into our stores, and we are pleased with the early adoption we are seeing. Turning now to Field & Stream. Our 7 grand openings this quarter performed in line with our expectations, and we continue to see opportunities to drive sales and margins. We are learning a lot from our initial stores, and we are incorporating these learnings into all of our existing and future stores. Now I will turn the call over to André to discuss our financial performance, capital allocation and 2014 outlook in more detail. André Hawaux: Thank you, Joe, and good morning to everyone. Today, I'm going to cover 3 topics: first, our third quarter results; next, our capital allocation strategy; and finally, our outlook for the fourth quarter and the full year. Starting with our third quarter results. Total sales increased 9% to $1.5 billion. Consolidated same-store sales increased 1.1% compared to our guidance of 1% to 3% same-store sales growth and compared to a shifted comp of 3.3% in the third quarter of last year. DICK'S Sporting Goods' consolidated same-store sales increased 1.7%, while Golf Galaxy decreased 8.9% in the third quarter. The 1.7% consolidated increase in the DICK'S business was driven by a 1% decrease in traffic and by a 2.7% increase in sales per transaction. E-commerce penetration was 7.3% of the total sales in the third quarter compared to 6.5% in the third quarter of last year. Moving down the income statement. Third quarter gross profit was 452 point -- $452 million or 29.6% of sales and was down 74 basis points from the third quarter of 2013. This was due primarily to a 53 basis point decrease in merchandising margin, as well as occupancy deleverage and increased shipping expense as a percentage of sales due to the growth of our e-commerce business. SG&A expenses in the third quarter were $357.7 million or 23.43% of sales and leveraged 40 basis points for the third quarter -- versus the third quarter of last year. This was primarily due to lower administrative and payroll expenses as a percentage of sales. Preopening expenses were $14.3 million, a $2.2 million increase from the third quarter of 2013. The increase in our preopening expenses primarily reflects an increase in the number of Field & Stream stores opened in the third quarter this year relative to the prior year. For the third quarter, we generated earnings of $0.41 per diluted share compared to earnings of $0.40 per diluted share in the third quarter of last year. Now turning to the balance sheet. We ended the third quarter of 2014 with approximately $78 million of cash and cash equivalents and $281 million of borrowings outstanding under our revolving credit facility. Last year, we ended the third quarter with about $66 million in cash and cash equivalents and $116 million of borrowings outstanding on our revolving credit facility. Over the past 12 months, we have invested in our omni-channel growth, invested in Field & Stream, and we've also returned over $410 million to shareholders through share repurchases and dividends. Total inventory increased 12.4% at the end of this year's third quarter compared to the end of last year's third quarter, including inventory to support the growth of our Field & Stream stores and inventory for the upcoming holiday season. We are comfortable with the level and the quality of our inventory. Net capital expenditures in the third quarter were approximately $78 million or $121 million on a gross basis. This compares to a net capital expenditures of $77 million or $101 million on a gross basis in the third quarter of 2013. Turning now to our capital allocation strategy. As Ed mentioned, we repurchased an additional $75 million of our stock in the third quarter of 2014, bringing our fiscal 2014 repurchases to $200 million. As we've discussed in the past, we expect to use our repurchase program to both offset dilution and opportunistically repurchase shares. Since we started our $1 billion authorization at the beginning of 2013, we have repurchased over $455 million of stock and have approximately $545 million remaining under the authorization. Now turning to our guidance. As Ed outlined, we believe we have the merchandising and the marketing plans in place to drive sales during this important holiday season. Our fourth quarter same-store sales and EPS guidance also reflects our expectations for a promotional holiday. For the fourth quarter, we anticipate consolidated earnings per diluted share in the range of $1.18 to $1.28. Consolidated same-store sales are expected to be in the range of 1% to 3% compared to a 7.3% increase in our shifted comp in the fourth quarter of last year. Gross profit margins are expected to decrease as a result of planned promotional activities and from an increase in shipping expense as a percentage of sales due to the continued growth of our e-commerce business. SG&A expenses as a percentage of sales are expected to leverage, and we will closely monitor our spending plans. For the full year 2014, we now expect consolidated non-GAAP earnings per diluted share in the range of $2.75 to $2.85 and same-store sales to increase in the range of 1% to 2%. Gross margin is expected to decline, and SG&A is expected to leverage slightly. Preopening expenses are expected to be higher due to the increase in store openings compared to last year, including our Field & Stream stores. In summary, our third quarter earnings were at the higher end of our guidance. Excluding the headwinds in golf and hunting, the rest of our business delivered a 4.6% comp increase. We also continued to demonstrate our commitment to returning capital to shareholders, repurchasing $75 million in stock in Q3. As we look to Q4, we believe we are well positioned to drive sales growth with the strategies we have in place. Our guidance reflects these strategies, combined with the expectation of a promotional retail environment. This concludes our prepared comments, and I'd like to thank you for your interest in DICK'S Sporting Goods. Operator, please open the line for questions.

[Operator Instructions] And our first question is from Seth Sigman of Credit Suisse.

I wanted to just first focus on the traffic commentary, so down 1% this quarter. Maybe you could just elaborate on what's driving that. It seems like it's a little bit of a change in the recent trend. And I know you don't typically talk about trends within the quarter, but was there maybe a weather issue or something related to that, that maybe pushed some sales into Q4? Any commentary there would be helpful.

I wouldn't say there was much of a weather change. And the big issue around traffic is going to be around that gun and ammunition business. The third quarter -- third and fourth quarter are important quarters here, and that business just hasn't recovered quickly as we thought it would.

Okay. So just a follow-up on that. If you look at the categories, excluding hunting and golf, up 4.6%, it did seem to moderate a little bit versus prior quarters. Any more color on why that may have moderated?

We had kind of started some of these moves earlier -- earlier last year, when we tested this, but a big part of that was around the World Cup. And the World Cup, as we talked about, drove a pretty good comp in the second quarter.

I see. Okay. And just focusing on the space reallocation work. The improvements that you're seeing in that part of the business that you've made some changes, do you feel like you're getting incremental traffic there? Or are you just starting to see better conversion? And then, as you look to 2015, is there another phase of the space reallocation work to come?

So I think we're getting both better conversion, and I think we're starting to get a reputation of having this product, and so I think it's starting to generate some additional traffic. We're not going to be changing space significantly next year versus what we've done this year, but I think that the content we have coming in will be better next year than it has been this year, which was pretty good this year. We think we've just got that extra experience. It will be -- we expect to see gains there next year also.

Thanks for the color. And Joe, best of luck.

Thanks, Seth.

Our next question is from Robbie Ohmes of Bank of America Merrill Lynch.

Joe, best of luck as well.

Thanks, Robbie.

You -- I think a couple of you mentioned the promo environment being baked into the guidance for the fourth quarter. Could you give us a little more help on how the promo environment is the same or different from last year? And then, if possible, some commentary on whether you're seeing, say in team sports, any improvement competitively coming out of Wal-Mart or Target, sort of the discount end? And then similarly, I think Macy's is taking on more apparel from Nike and Under Armour and sort of how you see that playing out in your promotional environment comments for the fourth quarter.

Sure, Robbie. So from Macy's, they have -- they've certainly made some moves in that area, but I think the moves that we did have counteracted any of the gains that Macy's may be taking. So I think some market share that Macy's may be getting isn't coming from us with the changes that we've made. And we really haven't seen any meaningful change in Wal-Mart from the team sports standpoint. So all of that is -- we really haven't seen a big change. And Robbie, I'm sorry, what was the first question?

So when you guys are talking about the guidance assumes a promotional environment, so it's not coming from Macy's or Wal-Mart. Sort of maybe help us understand how it's the same or different from last year's holiday.

Well, I think that where we see some promotional aspect is going to be around the -- that hunt business has gotten to be a little bit more -- a bit more promotional. And I think that, depending on how the weather plays out, I think people are going to be very promotional to clear out those seasonal products, and we want to make sure that we're moving right along with the rest of the market there. A lot of retailers have talked about how they're going to be promotional based on the cautious consumer, and we just need to be cognizant that those -- that, that environment is out there.

Our next question is from Brian Nagel of Oppenheimer.

A couple of quick questions, if I could. First off, on the gross margin side, and particularly with respect to golf, so you took, I guess, pretty significant markdowns in the golf category in Q2. Was there any impact here in Q3 of the flow of that product, then, after it was marked down on the gross margins?

No.

No.

Okay. So -- and then as far as golf, are the markdowns basically done there, then?

Yes. Our inventory's in great shape. The -- I think the inventory at the vendors is in better shape than it has been. So yes, we don't see any meaningful -- those markdowns around golf are behind us.

Okay. And then the second question I have, with respect to just the comps. You obviously gave us the guidance and talked some color around that, too. But conceptually, how do you -- you do have a difficult -- a much more difficult comparison in the fourth quarter. How do you think about managing your sales and your guidance around that difficult comparison?

We take a look at opportunities where we think that we can drive business. We've taken a look at that kind of the trends that we're having today. Some of these categories that are doing quite well, we're -- the categories that are doing quite well are big, important fourth quarter items. So the women's business, we think that youth business, we think the team sports business, we think the comps, it [indiscernible] are going to somewhat moderate. And we thought it would be relatively flat, maybe down a little bit, maybe up a little bit. But we've taken a look at this, and we're pretty confident where these comps are going to be. André Hawaux: And Brian, it's important to know, we'll also benefit again -- we continue to benefit from the space allocation. Remember, we got that done mostly in the -- by the back-to-school time frame. So year-over-year, as you look at what we're presenting to consumers, it's going to be a much more, as Ed has mentioned, a much more robust product offering in categories that are growing, specifically around that youth and women's apparel.

Our next question is from Simeon Gutman of Morgan Stanley.

Also, best of luck to you, Joe. One follow-up on the promotional environment, which you've called out all year. And I know you just called it out, maybe, for the fourth quarter. Can you give us a sense of how things are playing out different than how you're planning for things promotionally? Meaning, how much is being improvised promotionally versus what you're executing against plan?

Right now, it's been pretty close to what we have planned it to be. We've gotten a little bit more aggressive at times in the hunt category than we had anticipated. So other than the gun and ammunition business, the promotional environment that we've executed against has been pretty close to our plan.

Right. Okay. So it doesn't sound like it's gotten hotter or colder. And then with respect to golf, you mentioned your inventories are in great shape. But what kind of medicine have the manufacturers taken? How are they looking at the category now? I guess you can't control how much they produce, but you can obviously control what you take in. So in other words, how do you avoid the markdown risk, let's say, if the season's okay but they still overproduce?

Well, I think that there's certainly a chance of that, although I don't think that, that's going to happen. I think the manufacturers have done a very good job of getting their inventory cleaned out. The new product offerings are a little bit more focused than they have been in the past. The conversations we've had about the next iteration of products or product launches after what's happening this fall and early spring, there's not people rushing to get product out there to drive sales. I think that they're going to kind of take -- everybody's talked about that the business needs to shrink in order to be more profitable, and I think that's what's going to -- I think that's going to happen. So I think the manufacturers are much more disciplined. The retailers are much more disciplined. And I think the golf business is going to be a -- it's going to be an okay business. I don't think it's going to be a great business, but it's going to be an okay business. And we'll kind of hit bottom here in the next quarter, probably, and we think that we'll see increased profitability going into next year.

Our next question is from Camilo Lyon of Canaccord Genuity.

Ed, just curious on the golf business as well. Are you seeing any divergent trends amongst the brands? Or is it pretty broad-based comparable trends across all the brands?

Well, I think there's some brands that have moved market share around. I won't comment on those, but there are some brands that have moved market share. But we don't see any brand really falling off -- that's really taking big market share. We don't see any other brand really getting hurt significantly.

Okay. I'm just trying to get a sense as to, once you're kind of clear of the inventory -- it sounds like you are already, actually, that in the alignment of the inventory at your stores of the better-performing brands could actually result in some positivity in the category. Is that a possibility next year?

Well, I don't want to get ahead of ourselves and kind of say what we think is -- give guidance to what we think the golf business is going to be. But as I said, I think it's going to hit bottom -- may have already hit bottom, but -- because some of the new product launches have done quite well with the Titleist 915 from a presell standpoint, some of the things that we've done with the TaylorMade irons. We think that -- we think it's going to be a more profitable year next year. We'll just leave it at that.

Okay, fair enough. And then just on the opening price point strategy that you engaged in a few quarters ago. If you could just update us on the -- on how that strategy's unfolding and if the consumer's really responding to that, I mean, being drawn to that opening price point and if you feel you need to expand the breadth of the products that are on that OPP strategy to better compete with some of your more direct competitors.

Yes. No, we really -- the OPP strategy we put in place, we feel that we've done a very good job. We don't think we need to expand it significantly. There's a couple of areas that we're going to -- we will whip some more OPP in, but it's very, very, very little. We're really pleased with where we're at right now.

Great. And then just a final question on -- the other retailers have spoken about cold-weather products selling earlier in the season than they would have expected. Just curious to get your take on that and if you're seeing that as well and how you feel you're positioned from an inventory perspective to capture and capitalize on that category in the fourth quarter.

We won't specifically talk about what's going on in the fourth quarter, but we feel that we're very well positioned. As we talked about before, we've got partnership orders with a number of vendors that we've got goods sitting out there that are reserved for us. If we need it, we can take it. So as the weather that we have continues, we'll be able to chase merchandise. But if it warms up -- it's still a long quarter. If it warms up and -- we've got the ability to not take that product so a little bit that we can control those inventories and control those markdowns.

And Joe, all the best to you as well.

Thank you.

Our next question is from Kate McShane of Citi Research.

And Joe, best of luck.

Thanks, Kate.

I was wondering if you could give any insight into how footwear performed during the quarter relative to the core comp and if there were any items for this upcoming holiday season that you think is unique and could be a driver like GoPro or something else.

So we won't get into just what the footwear business has been specifically, but there's been -- I'm pleased with our footwear business. We think that some -- there's some categories of business that we've got for the fourth quarter that we're pretty excited about. That whole electronics category around GoPro, the Fitbit, the wearables, we continue to be extremely enthusiastic about and have been performing quite well.

Okay, that's great. And then do you have any commentary or thoughts around how your business might be impacted by the West Coast sports strike over the next quarter or 2?

Yes. So at least for the fourth quarter, I mean, most of the products that we need, we've got. We don't -- we've made some modifications in our shipping strategies to try to avoid the West Coast, but it could have an impact. Right now, we don't really see anything meaningful.

Our next question is from Paul Swinand of Morningstar.

I wanted to ask a question around the real estate in the Field & Stream. I know in the past, even at the Analyst Day, you said it was similar demographics, and often, you were finding the same type of boxes near a DICK'S store. Now that you've got a little -- a few more openings under your belt, both for DICK'S concept and the Field & Stream, is the availability and the pricing of real estate there that you can continue with your opening plans over the next, say, 5 years, do you think?

Yes. No problem at all. Yes.

And you're still thinking that it's the same demographic, the same area sort of like the Cranberry store, where it's almost in the same -- right in the same shopping area? Is that also the strategy?

Yes, so the demographics are different between the 2 brands, but the real estate strategy and the area that we put them in is relatively similar. So where we are in Cranberry is a perfect example. Kind of where we are down in the South Hills in Pittsburgh is a perfect example. In Columbus, Ohio, we've got a DICK'S store lined up right next to a Field & Stream store. And both the stores, we're really pleased with their performance so far.

Are there some geographic areas, where, although there's a DICK'S store, it just wouldn't support a Field & Stream?

Sure. There's definitely some areas like that. I mean, a perfect example would be Southern California.

Okay. Is that -- I mean, can you give us any hint? Is that about 20% base or what? What would that exclude?

I'd say 20% is probably a pretty decent number.

Okay, great. I just wanted -- trying to get -- get at the long term.

The 20% that you'd exclude.

Yes, exactly. And then I just wanted to ask a quick housekeeping question. You're -- I'm not trying to be flip here, but the fourth quarter guidance is on 120 million shares, and you ended the quarter with 120 million diluted. But then it looks like the full year contemplates about a 1.2 million reduction to 118 million, 118.8 million in the fourth quarter. So are those on 2 different share count bases? André Hawaux: I think the share count bases are slightly different. I think you should be looking at -- we don't have a number of 118 million in there. I think it's 121 million is what you should look at your number.

So I'm saying that to get down to an -- a weighted average of 121 million a year, and maybe it's just the timing of when it was bought back in the quarter, but it looks like you're going to buy back another at least 1 million shares in the fourth quarter by the full year guidance. André Hawaux: You should use 120 million for your Q3 number and 121 million for the full year number as you look at that.

Our next question is from Scot Ciccarelli of RBC Capital Markets.

Scot Ciccarelli. Can we get -- I know we've been kind of talking about golf and hunting for the last couple of quarters. Can we get an update where we stand in terms of the vendor store rollouts? And is it fair to assume that these vendor store areas still generate higher sales and margins than other parts of the store? Or has any of that changed at this stage?

When you're talking about vendor shops, you're talking about the Nike shops, TNF and Under Armour?

Yes, correct.

Yes, they're still going great. We continue to invest in them, and we're very pleased with those. They've been very productive.

And do you have an update in terms of numbers or penetration percentages? André Hawaux: Yes. Let me give you that, Scot. So right now, we opened an additional 24 Nike Fieldhouse shops in Q3. That brings the total to 342. We opened up an additional 28 UA shops. That brings the total to 287. We've got 89 permanent TNF shops, but as you know, with the season, in Q4, we'll put in 90 seasonal outpost shops that are happening in Q3. Those are the, I think, the bigger brands that you look at.

That's very helpful. And then just a housekeeping one here. You -- can you talk about expected debt leverage targets, just to help us better understand your capital allocation plans? Obviously, the revolver has been taking on a little bit more capacity. Is there a more permanent plan on that front? André Hawaux: No. Right now, we're using our revolver to do the things that we need to do. We've not discussed, and we're not going to -- we're not discussing on this call what our leverage strategy is going to be.

Our next question is from Stephen Tanal of Goldman Sachs.

I wanted to follow up on the hunting business. The pressure you're seeing there, is that more on ammunition or more on guns? And I'm sort of curious how you frame it versus kind of the NICS data that we're all looking at, which obviously would suggest October was a pretty strong month for firearms specifically.

Yes. We're seeing some pressure, a little bit of pressure on guns and some pressure on ammunition, too. So it's actually both.

Got it. And your expectations for the fourth quarter, I know you said that you expect the hunting business to be flattish. How does that compare to kind of your prior expectations for the business?

Pretty close.

Got it. Okay. And then switching gears a bit. I'm sort of curious. I guess, October was pretty warm in most of the country. I was wondering if you'd care to comment on sort of the impact of weather in the third quarter and how it might be affecting your fourth quarter outlook.

Yes. I mean, I don't think the weather had a big impact one way or the other.

Got it. And -- sure. I guess the cold weather was likely a little bit helpful here. I guess, was there much variability in cost through the quarter? Or was it pretty consistent, then?

We've never commented kind of on what's happened through the quarter. Our comps -- we comped at 1.1% for the quarter, which we had hoped we'd do a little bit better than that, but because of -- the gun and ammunition business was really the drag on the comp number.

Versus planned, sure. Understood. And then last for me. You guys mentioned 2 closings of Galaxies in the fourth quarter. I'm sort of curious, how many total leases are coming due in the quarter? André Hawaux: I don't have that -- do you have a number?

Yes, I do. We've got about 63% of our Golf Galaxy stores are coming up for option over the next 3 years. But what we've got in the quarter, I'm not sure, but we're not closing any other than those 2.

Our next question is from Sean McGowan of Needham & Company.

I wanted to just tack on a little bit onto Scot's question earlier. Can you give us a sense of what the revolver will be at the year end? Do you expect it to be cleaned up at year end? André Hawaux: Yes. Yes, we do. We expect to come out, exit the year without any borrowings on our revolver as we have in the last several years. We typically, because of getting ready for the holiday, we typically are into our revolver, usually in Q4, a little bit early part, then we come out clean.

Okay. And then a couple of Field & Stream questions. Can you give us a sense of what the inventory build year-on-year would have been for the whole chain if you exclude inventory build related to the Field & Stream stores? André Hawaux: Yes. It'd be about 7.8% -- 8%.

8%. Okay. And then on Field & Stream, so you've got quite a number of openings over the last 12-plus months. When you say it was -- these last ones were up to your expectations, were those expectations raised by the strong performance of the first couple of stores? Or were there -- were your expectations the same as they were before you opened the first store?

We've had the same expectations.

Our next question is from Lee Giordano of CRT Capital.

Can you talk a little more about the remodel program and what the remodels entail currently and if you're seeing a nice benefit in comps as you remodel these stores?

Yes. We've seen a big benefit when we've remodeled the stores.

What exactly do you do when you actually remodel? Do you put new shop-in-shops in? And how much do you typically spend on a remodel?

Yes. We do. We look at shop-in-shops as an opportunity. We look at some of the portal walls as an opportunity. The shared service footwear deck in the front end are the primary areas that we look to enhance, that area down the middle of the store that really focuses on those businesses that are working pretty well for us around the athletic apparel and shops, youth apparel and footwear. But we've seen some pretty good results out of these remodeled stores. And as far as cost for the remodel, we're not going to get into store specifics.

Okay. And then any updates on the fitness category? I know you're taking out some space there, but any improvements or deceleration there?

Yes. We've actually been very happy about what's happened with our fitness business. We've actually -- while we're not going to give specific numbers, this past quarter, we actually comped positive in that space and have done so over the last several quarters. So we're pretty happy about what we've done in terms of reducing that space and still bringing the offering that consumers want.

Our next question is from Mark Miller of William Blair.

Good luck, Joe.

Mark, thanks.

Yes. I know the formal 2015 guidance comes with the fourth quarter, but at a high level, could you give us some perspective about how we approach next year? You talked about golf being better, but maybe you could add some of the other puts and takes you see. And then, specifically in e-commerce, how do you view that as an investment next year as compared to what you're investing this year? André Hawaux: Mark, you answered the question right when you started. We're not going to provide guidance for fiscal year 2015 on the third quarter call. We will do so on the fourth quarter call, as we -- as is our typical norm. So I'll leave it at that.

From an e-commerce standpoint, we'll continue to invest in e-commerce, roughly about relatively the same as what we've done this year. We continue to be enthusiastic about what we're seeing from our e-commerce business. And as we continue to move through this process of exiting what we're doing with GSI, we're going to continue to make these investments. And we're really pleased with what's going on there right now.

Great. And then on Field & Stream, can you give us some sense of what penetration has been so far for private brand and where you think that can go? And then if you can remind us, what are the other factors there that you think can help improve margins relative to the core DICK'S business? André Hawaux: Yes, sure. The private brand penetration is hovering around 7% right now. And as far as where we see the opportunity, it's too early to comment on specific performance, but we think there's an opportunity to continue to refine our assortment around the products and brands that the customers are looking for. We continue to test and invest in new opportunities. Some of the things that we've tested, expansion of workwear, a Western boot shop, general store area, and we think that's going to drive box productivity and margin rates as well. So that's just some of the things that we're exploring in the Field & Stream stores.

And then final question for me. You got leverage on admin and payroll in the quarter. I was encouraged to see that, given you had been, I thought, making a somewhat greater investment in service in the stores. So can you explain how you accomplished that? André Hawaux: Certainly. It didn't come at the expense of not putting the dollars and the labor in the store. Actually, it came out of a lot of our administrative costs here in Pittsburgh, and our associates are being mindful in terms of how we do that, and they understand how important that is to the organization as we continue to drive to delivering our EPS goal. So I think a lot of it came out of the headquarter piece. We continue to invest in our stores.

Our next question will come from Sam Poser from Sterne Agee.

I wanted to just follow up on that. I mean, can you give us any color on the -- how this level of service or the number of people working in the stores may have changed over the last year or so or how you've realigned?

Yes. There's not much -- there's not a significant change. Actually, we've put some more service into the stores, which we talked about last year that we reinvested in some payroll dollars. So if anything, it's remained relatively constant to up a little bit.

And then how should we think about -- I mean, I know you won't talk about next year, but how should we think about the sustainability of -- how much lower can the overall SG&A go as a percent of sales if you sustain like a low single-digit comp?

Can you repeat that again, Sam?

I guess, like how long can we expect leverage on low single-digit same-store sales?

Well, we're also opening up additional stores, Sam, so that gives us some additional dollars to leverage those fixed costs that we have here in the home office, in our distribution centers. So there's still leverage even with single-digit -- low single-digit comps. André Hawaux: And Sam, I think it's also important to note, one of the things we started to articulate to our investor base is that you have to look at the leverage factors around not only comp, but around our total sales, including the new stores that we open. And the other things we're doing is, as we continue -- and Joe pointed this out, as we continue to leverage ship-from-store and things like that, we're continuing to get a lot of leverage from the store labor that we deploy against those services as well. So I think you have to look at it in totality.

And then just one other thing. The smaller market stores, can you give us a status update how many there are and how that's doing and sort of what your plans are there looking ahead? André Hawaux: Yes. I would think of our smaller store growth as somewhere in the neighborhood of 25% to 30% on an annual basis.

And the stores that we've opened up, Sam, are doing extremely well. We're really pleased with this program so far.

Are you seeing better sales per square foot in those smaller stores than you do in the larger stores, as you think about it in the bigger picture?

Slightly better. Not significantly, but a little bit. But some of the cost associated with those stores are less costly, so less rent, less marketing expense. But we're very pleased with [indiscernible].

If I could do one more, just on Golf Galaxy. What are you expecting out of that? I know you're closing a couple in Q4. But I mean, when you think ahead, what is keeping you involved in that, given the weakness in golf? Wouldn't you expect your golf business to improve at DICK'S if you took a more active approach in shuttering more of those stores?

Sam, we've answered this question for -- we've answered this question on a number of occasions of how important the Golf Galaxy business is to our total golf business. We've indicated how important it is to our vendor relations. And also I -- would we get some benefit at DICK'S if the Golf Galaxy stores closed? Yes, we probably would, the ones that are right next to a DICK'S store, but we think the market share is really important. And we do think that the golf business is going to bottom and that it's going to be more profitable. So we are not exiting -- I mean, we've been very clear about this. We are not exiting the golf business, and we're not exiting the Golf Galaxy business.

And good luck, Joe.

Thank you.

Our next question is from Michael Baker of Deutsche Bank.

A couple of questions. First, on that golf business. Could you talk about, by the year end, what percent of your total sales it will be? What was it a year ago? Where is it going? And then, related to the Golf business, you're implying down 8.9% -- or, I guess, you said down in line with Golf Galaxy, 8.9%. I think it was down less than that in the second quarter because you said it was better than the Golf Galaxy. So do I interpret that right that golf -- that the year-over-year trends in golf has gotten -- have gotten worse in the third quarter?

Not a lot. If you remember, we got very promotional in the second quarter that we discussed that we got very promotional from a price standpoint to try to clean through this inventory, and we've cleaned through the inventory. So I -- we're very pleased with the inventory levels we have in golf right now. We think golf will continue to be a smaller percent of our business, which we've talked about, because other areas of business are going to grow at a faster rate. Golf, we think, is still going to struggle a little bit, we think. As I said, I think we're going to hit, probably, the bottom here in this quarter. And I think, going into next year, the golf business is going to be meaningfully more profitable than it has been over this past year. And we're somewhat enthusiastic about the -- cautiously optimistic, I should say, on the new products that some of the brands are bringing out.

Okay. And then a sort of similar type question -- well, a different question. On Field & Stream, so hunt is not quite as good, and you're a little bit concerned in the fourth quarter there. Does this change at all your thinking on the long-term viability of the Field & Stream stores? Or is it just a little bit of softness there and nothing to worry about too much?

Yes. We think the hunt business is a little bit different than the golf business. We think the hunt business is rebounding. We indicated that we think it will be flattish in the quarter. So we think this is more of a short-term issue than a long-term issue. As we look at our broader outdoor business, the broader business has been very good, remains very good, and we continue to be enthusiastic about opening up Field & Stream stores.

Okay, one more, if I could, is on the merchandise margin, it was down 53 basis points. Better than it was last quarter, but you said it wasn't really impacted by golf. So what is impacting the merchandise margins? Is it the markdowns in the hunt business? And what is the expectations for merchandise margins in the fourth quarter? I know you said gross margins down. Is that down less and less of an impact from merchandise margins?

We took some -- we did -- as I said, we did get a bit aggressive in the hunt category to try to drive business. We took some markdowns to clean up some of this inventory, some of that around golf, some around other areas. But again, we're really pleased with our inventory levels. Our clearance levels are relatively consistent with what they have been in the previous third quarter. So we've kind of got these markdowns behind us, and there may be some margin rate pressure from the promotional environment out there, but it won't be because of markdowns that are required.

Our next question is from Matt Nemer of Wells Fargo.

First, on the footage reallocation. I know it's early, but could you talk to what you're seeing in terms of sales and gross profit productivity in that space relative to what it was before? And then, is it fair to assume that 100% of that is incremental to the other apparel space in the store?

We're pleased with what it's doing. And incremental, it's incremental to the space of what we reallocated. It's doing more business than what we took out, so to speak. So yes, we think it's certainly incremental and accretive.

I guess, another way, do you think that, that's stealing some sales from other areas in the store? Or is she going in and buying something in the previous apparel footage, as well as the new apparel footage?

Yes, that's incremental. So she's buying more product. She's coming in more often. It's incremental.

Okay. And then secondly, your e-commerce performance was very strong in the fourth quarter over the last couple of years. And I'm just wondering if you think that'll be a big driver again in the fourth quarter of this year, as it was in the past few years.

I think it will be meaningful. We're starting to move off -- get to a bigger base. So it will be a little bit more difficult to have the same kind of comp gain, but we're looking for a pretty solid comp gain in the -- in our e-commerce business.

And then just lastly, housekeeping. Your preopening per store was down, which is surprising. I would think that the Field & Streams have pretty high preopening expense. So just wondering if you can comment on that. André Hawaux: Yes. Matt, I'd have to go -- I'll go back and take a look at that. You're right that our Field & Streams, typically, our pre-openings and our grand openings are slightly larger because we create a lot of theater around these locations. As you know, they're -- the brand is being introduced in many, many markets. So I'll go back and take a look at that. That was probably just timing is the only thing I can think of. I can't imagine that your math isn't right, so it's got to be timing quarter in, quarter out.

Our next question is from Peter Benedict of Robert W. Baird.

Just following up on a couple of questions ago. Just on gross margin, André. So when we think about that in aggregate in the fourth quarter, do you think the declines will be on par with what we saw in the third quarter? Or should we continue to see some moderation in the pace of decline in gross margin? André Hawaux: I think you should see a moderation in decline. As I talked about on our Q2 call, our Q3 results were going to be better, and I do believe that our Q4 results will be, in the aggregate gross margin, better than you saw in the Q3. And the composition is going to be a little bit different. Obviously, our shipping expenses will be higher as a percentage, given the weight that our e-commerce business is in the fourth quarter, but I think you'll see some potential positive movement on occupancy leverage and things like that. So I think better to answer your question, the components will be a little bit different, given the weight of the various businesses in the quarter.

Sure. Okay, that makes sense. And then just circling back to the golf category. I know, as you're saying, potentially bottoming here. Just as we think about the fourth quarter, I assume you guys are expecting continued declines in comps. Do you just expect them to moderate, expect them to be at kind of the same level as you saw in the third quarter? Any kind of color on what you're planning for golf from a comp perspective in the fourth quarter would be helpful.

Yes, I think that the comps in the fourth quarter are -- for golf are going to be somewhat related to weather. So if guys are out playing golf, they're going to be a little better than if they're not playing golf. So -- but golf, this is our smallest quarter for golf. And especially in Golf Galaxy, it's the smallest quarter. And one of the things that I'd like to make sure that everyone understands, we've had a lot of conversations about the golf business and why are we staying in Golf Galaxy and all that. I just want to make everybody aware, Golf Galaxy is profitable. Although the comps have been difficult, Golf Galaxy is a profitable operation, and it is accretive to earnings. And sometimes, I think people might lose sight of that. But the comps in golf, I think, will -- they might be relatively the same, they might moderate a little bit. But I think, as we go into next year, they will be better than they have been this year.

Next question is from Michael Lasser of UBS Investment Bank.

My first one is, Ed, on -- earlier in the call, you mentioned that you're not planning any space reallocation for next year. Is that because you think the categories that you addressed this year were the only ones that were affecting the business? Or the business won't really benefit from having a more dynamic approach to space allocation within the stores?

Well, I interpreted the question to be any significant space allocation or growing the areas that we've already grown. So the areas that we've already grown are -- that's completed. We're very comfortable with that. We may try to get a little bit more area for the youth business, but all in all, that's basically done. So that was my interpretation of the question. To broaden the question, will there be other areas of space allocation changes? Yes, there will be. We're not going to go into that right now, as we're still working through some of these, but we do expect to change some space allocation next year. It won't be as big a change as what we did this year, though.

Does that reflect just a difference in philosophy, where you will take a more dynamic approach to how you allocate space within the stores?

I think we're just taking a look at some of the opportunities that we see out there based on where the environment is today. And when we think we need to change space, we'll change it. But we won't change it just to change it, and we think that there's a couple of other areas where we think we can get some meaningful change from a sales trajectory. And the categories that we're looking to commodify with more space are higher profit margin categories.

Okay. And you mentioned that you are expecting a promotional holiday. What's going to get the promotional environment to get better as we enter 2015; you're in more and more markets; you're facing Academy, which seems to be the source of a lot of the pressure; online is obviously -- and some of the online competition is not going away? What's going to cause it to be less promotional?

I think just having the consumer gain more confidence in what's going on. And I think that, that -- that could -- hopefully, could start to happen next year. But I think it's all based on the consumer.

And then my final question is on the guns and ammo business. Is there anything else besides an easier comparison in the fourth quarter that's motivating some of your confidence in the outlook of that category?

No. [indiscernible] easier comps.

Our next question is from David Magee of SunTrust Robinson Humphrey.

I just had a couple of questions on the e-commerce side. The growth sort of has stepped down this year and -- although it was still rapid. Have you updated your plans, either officially for us or just internally, about what you think the penetration of that channel might be for you guys eventually?

We talk about it internally all the time. We haven't updated anything publicly, nor will we right now. But yes, we talk about this almost every day. We think that there continues to be, obviously, a very big opportunity from an omni-channel standpoint. And we're taking a look at how to best do that, whether that is some of the things that we're doing with our site, what we're doing to streamline the ship-from-store process, whether that's continuing with our vendor direct programs. We have -- we talk about how we can increase that percentage every day.

Are there opportunities for you to carry vendor products that are not even offered by the vendors on their sites?

I would say that's going to be pretty remote that there's something that the vendor would be making that they wouldn't put on their site that they would only put on our site.

And then lastly, the -- is the loyalty program important to your share gain in e-commerce?

We think that, that is, yes. And we've made some strides in what we're doing from a loyalty program there. And we're seeing increasing sales with our loyalty program online.

Our next question is from Joe Feldman of Telsey Advisory.

I wanted to go back to the online business for a second and wanted to better understand, like, what percentage of your online sales are being shipped from the stores? And I know the Buy Online, Pick Up in Store is early, but similar kind of question, like what percent of people are picking up at the store? And when they do, are they buying more than just what they initially bought online? I was just kind of curious about some of those 2 dynamics.

So the Buy Online, Pick Up in Store, that's still a relatively new program that's a pretty small percentage of our business right now. As far as ship-from-store, we've gotten great leverage out of -- from an expense standpoint with our ship-from-store capability. And although we're not going to give you a specific number, it's a meaningful number.

Got it. And then, I may have missed it, and I apologize if I did, but we keep referring to the hunting category. But I recall in past quarter -- last quarter, anyway, you had also said, excluding just the pure hunting like gun and ammo, the rest of the outdoor categories were actually pretty decent in the second quarter. And I was curious if you broke that out this quarter, or if you haven't, if you would maybe talk about some of the other outdoor categories and the performance there? André Hawaux: Sure. So we typically delineate the lodge hunting business, and we also talk about businesses such as outdoor equipment. So that would include things like lifestyle camping, bikes, water sports, paddle sports, et cetera. And that category, outdoor equipment, actually comped positive this quarter, did fairly well. And it was really driven by lifestyle camping and paddle sports, where we did very well in Q3. So we were very happy with the performance of that business. We're not going to get into specific comps, but we did do very well there.

Good luck, Joe.

Thank you.

Our next question is from Rick Nelson of Stephens.

This is Nick Zangler in for Rick Nelson. I just wanted to clarify, in the average store, you've increased women's and youth apparel categories by just greater than 1,000 square feet. Is that, right?

Yes. We took 1,000 out of golf, we said. We took some space out of bikes. We took some space out of the fitness area. We haven't kind of said specifically what that was, but the women's and youth business took some space from all 3 of those categories.

Okay, got it. And last quarter, you had mentioned that both these categories increased north of double-digit comps. Did that continue into the third quarter?

Yes.

Great. And then EPS impact of promotional activity was $0.04 in the second half. Is that still looking to be the case? And is that evenly split? André Hawaux: Yes. I think we talked about that at the end of our -- on our Q2 call, and I think that's been baked into the guidance that we have. So how that gets shaped between 3 and 4, we'll leave that for you all to figure that out. But I think it's about the $0.04 we talked about. That hasn't changed. And as you know, our guidance hasn't changed. We actually took the bottom of our range up to $2.75 versus $2.70 and kept the range at $2.85 -- $2.75 to $2.85.

Yes. And does that -- I mean, obviously, you guys came in at the higher end of the range this quarter, but are you guys feeling more incrementally positive going into the fourth quarter, given that adjustment? André Hawaux: I think we feel, as Ed mentioned and we've all talked about, I think we feel that we are prepared for the holiday. I think we have a great marketing campaign that's out there that, hopefully, many of you have seen already running on TV. I think we have the assortment that our merchants have brought forward that consumers are going to look for. We're making big bets in categories such as wearables and other items that are going to be key items for us. So I think we feel pretty good, and I think you all should show -- I mean, I think we believe -- we've demonstrated by bringing the bottom of our range up that we feel very confident that we're going to be in that $2.75 to $2.85 number. And I think that does demonstrate we have confidence in where the business is.

Great. And then just lastly, on Field & Stream, curious, are you guys advertising the Field & Stream concept in those new markets when you go out? TV advertising?

We are. We're spending some money -- around the grand opening, we're spending money on television and radio in those new markets.

And are you still expecting perhaps 10 to 15 stores next year?

We haven't guided for 2015. We'll talk about that in our fourth quarter call.

Our next question is from Sam Reid of Barclays.

A quick question here. Now that you guys are 10 stores in with Field & Stream, what's surprised you with respect to their performance? And, I guess, more importantly, I mean, how has this changed kind of your perception of outdoor categories within your core stores?

I think one of the things that surprised us is just the participation in those sports with the woman consumer. So we've quickly learned that there's an opportunity there we've explored with some categories, especially around the apparel, but also in some of the hunting categories. And we've seen a pretty good response. So we're pleased with how the stores are performing so far.

And, I guess, kind of one follow-up. What's your perception -- I know it's very early on, but given kind of your clout within the overall space, I mean, what's your perception in terms of how your competitors have responded?

We haven't seen any meaningful difference in our competitors as far as store count or how they're -- how they're operating their stores.

Our next question is from Wayne Hood of BMO.

Ed, just a quick question for you. We understand that Nike is making some changes to their MAP pricing in some seasonal goods into next year. And I'm just wondering, as they kind of go down that path, does that have any impact on your -- how you think about the business either competitively or anything like that as they go through that?

No, we don't -- we'll have to wait and see. But we really don't think it's going to impact our business one way or the other. I think it will take some of the promotional activity out of the business. So it should help increase margin rates. And whether it has an impact on sales or not will have to remain to see, but we think it will be positive from a margin rate standpoint.

Okay. And André, just a couple of questions for you. You're up against a steep 6% increase in traffic in the fourth quarter because of what you went through last year. And I'm just wondering, as you think about that 1% to 3% comp guidance, what's embedded with transaction growth in the fourth quarter, in light of you coming off that decline in the third quarter? André Hawaux: Yes. So we're not going to get into the taxonomy of the traffic and our tickets and things like that. I do think I'll go back to what I just mentioned is I do believe we think our marketing programs are strong. I think we've bought against key items. I think our associates are geared up for a very strong holiday. So I do believe we're very comfortable, and we have to be very comfortable because we talked about it about that comp range that we're talking about for Q4. And understanding what we're lapping, we very much know what we're up against.

Okay. And then finally, I'm just trying to reconcile whether you -- your inventory is up 12%. Your sales are up 9%, and yet you say you feel comfortable with your inventory. Is that your comp store inventories are down? Or how do we reconcile the delta between the 2? André Hawaux: Yes. So if you recall, there was a prior investor that asked a question about how much of the inventory was related to Field & Stream. So if you just look at the DICK'S Sporting Goods inventory like-to-like, it's pretty much about 8% up year-over-year. So I think we're very comfortable. And we also have talked about -- I think Ed mentioned that our clearance inventory is at the levels that we expected it to be and very similar to where it was at Q3 last year. So we're very confident that we're exiting -- we exited Q3 with our inventory where we wanted it to be.

This concludes our question-and-answer session. I'd like to turn the conference back over to Ed Stack for any closing remarks.

Thank you. I'd like to thank everyone for joining us on our third quarter conference call, and look forward to talking to everyone guarding our fourth quarter results. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.